EU Carbon Border Adjustment Mechanism Begins Charging Fees: A New Era in Climate Policy

Jan 5, 2026 - 22:00

The European Union has entered uncharted territory in global climate policy. On 1 January 2026, the Carbon Border Adjustment Mechanism (CBAM) transitioned from a two-year reporting phase into its definitive regime, requiring importers to purchase certificates and pay fees based on the carbon emissions embedded in their products. The move makes the EU the first major economy to implement a fully operational carbon border tax, marking a watershed moment in the bloc’s ambitious drive toward climate neutrality by 2050.

From Transition to Implementation

CBAM’s journey began in October 2023 when importers of carbon-intensive goods first faced quarterly reporting requirements for embedded emissions—without any financial penalties. That transitional phase, designed as a “pilot and learning period,” allowed companies and authorities across the globe to adapt to the new system, test methodologies, and build compliance infrastructure.

Now, the stakes have risen considerably. From 2026 onwards, EU importers of goods exceeding 50 tonnes annually must obtain authorized CBAM declarant status and purchase certificates corresponding to the carbon dioxide emissions generated during production. The mechanism currently covers six sectors identified as particularly carbon-intensive and at risk of carbon leakage: cement, iron and steel, aluminium, fertilizers, electricity, and hydrogen. Together, these sectors represent more than 50% of emissions in industries covered by the EU’s Emissions Trading System (ETS).

The pricing structure is straightforward but potentially expensive. CBAM certificate prices mirror the EU ETS allowance price, which has recently ranged between €70 and €100 per tonne of CO2. Importers must surrender certificates annually based on verified emissions data, with the first declaration covering 2026 imports due by September 2027. Crucially, if exporters can demonstrate that carbon prices have already been paid in their country of origin—and those prices are recognized by the EU—those costs can be deducted from their CBAM obligations.

Economic and Trade Implications

The financial impact extends far beyond abstract policy frameworks. The European Commission estimates that CBAM could generate approximately €2.1 billion in annual revenue by 2030 as the scope expands and payment obligations increase. A portion of these revenues—€1.5 billion through 2028—has been earmarked for a Temporary Decarbonisation Fund designed to help EU industries cope with the implementation phase and maintain competitiveness in global markets.

For businesses, CBAM represents a fundamental shift in how carbon pricing influences international trade and supply chain decisions. Companies exporting to the EU now face a choice: invest in cleaner production processes to reduce embedded emissions, or absorb the additional costs of CBAM certificates. The mechanism is already spurring international responses, with countries from Egypt to India considering their own domestic carbon pricing systems to shield their industries from EU charges.

The trade tensions are palpable. The United States has pressured Brussels to withdraw or modify the law, arguing it creates massive barriers to transatlantic commerce—particularly concerning given that Washington tripled tariffs on EU goods and raised steel and aluminium duties to 50% earlier in 2025. China, India, Russia, and South Africa have similarly voiced opposition, characterizing CBAM as protectionism disguised as climate policy and raising questions about its compatibility with World Trade Organization rules.

Industry Concerns and Compliance Challenges

European industry itself harbors mixed feelings about the mechanism. While CBAM aims to protect EU producers already paying carbon costs under the ETS, critics argue the system remains too complex and burdensome. Accurately measuring embedded carbon emissions—particularly for products with complex global supply chains—presents significant technical and administrative challenges.

Jean-Marc Germain, CEO of Constellium representing the aluminium industry, warned that CBAM “risks weakening European aluminium competitiveness without delivering meaningful emissions reductions.” The concern reflects a broader anxiety: that the mechanism could inadvertently disadvantage European manufacturers competing in global markets while providing only marginal climate benefits if production simply shifts to jurisdictions with looser reporting standards.

The compliance burden falls heavily on importers, who must navigate intricate methodologies, obtain verified emissions data from foreign suppliers, and submit detailed annual declarations. Small and medium-sized enterprises importing less than 50 tonnes annually are exempt, covering roughly 90% of importers but only 1% of emissions—a deliberate design choice to focus enforcement where it matters most while minimizing administrative overhead.

Global Ripple Effects and Future Expansion

Despite the controversy, CBAM’s influence extends well beyond Europe’s borders. The European Commission’s post-transition review found that the policy has already motivated more countries to adopt carbon pricing systems, viewing them as both climate tools and shields against CBAM charges. This represents a potential diplomatic victory for Brussels, which has long championed global carbon pricing as essential to addressing climate change.

The EU has signaled intentions to expand CBAM’s scope beyond the initial six sectors. Proposals under consideration include downstream products containing high proportions of steel and aluminium, as well as potential future coverage of chemicals and other industrial materials. The Commission has also floated the possibility of including indirect emissions and Scope 2 electricity consumption in future iterations, further broadening the mechanism’s reach.

The phase-in remains gradual and deliberate. Until 2034, CBAM will only apply to the proportion of emissions not covered by free ETS allowances, which are being phased out over the same period. In 2026, importers will pay only a small percentage of the full carbon cost—approximately 2.5%—with that share increasing annually until reaching 100% in 2034 when free allocations disappear entirely.

A Test Case for Global Climate Governance

CBAM represents more than a technical trade mechanism—it’s a test of whether climate ambition can be reconciled with economic competitiveness and international cooperation. The EU is betting that carbon border adjustments will drive decarbonization in heavy industries without undermining its own industrial base or triggering destructive trade wars.

The coming years will determine whether that gamble succeeds. If CBAM catalyzes global carbon pricing and cleaner production methods, it could become a model for other jurisdictions. If it instead generates protectionist retaliation and supply chain disruption, it may force Brussels back to the drawing board. For now, businesses worldwide are adapting to a new reality: the price of carbon is no longer confined within national borders, and access to the world’s largest single market increasingly depends on demonstrating environmental credentials through verified emissions data.